Title
Commissioner of Internal Revenue vs. Manila Medical Services, Inc.
Case
G.R. No. 255473
Decision Date
Feb 13, 2023
The Court affirmed the CTA En Banc's cancellation of the Final Assessment Notice and Warrant of Distraint for lack of valid authority and procedural due process in the tax assessment of Manila Medical Services, Inc.
taxation
internal revenue
assessment

Case Summary (G.R. No. 230573)

Factual Background: PAN, FAN, WDL, and the Protest Process

The CIR, as the assessment and collection authority for internal revenue taxes, issued MMS a Preliminary Assessment Notice (PAN) dated October 19, 2010. MMS protested the PAN on November 24, 2010. Thereafter, the CIR issued a FAN dated March 25, 2013. MMS protested the issuance of the FAN on April 16, 2013, and the protest was received by the CIR on April 18, 2013.

A WDL dated September 5, 2014 was then received by MMS on September 12, 2014. The WDL demanded payment of PHP 79,960,408.62, representing MMS’s alleged deficiency Income Tax and Value-Added Tax, including surcharges and interest. MMS treated this enforcement as adverse and filed a Petition for Review before the CTA on October 10, 2014.

CIR’s Answer and Affirmative Defenses

When directed by the CTA, the CIR filed its Answer on November 21, 2014. In addition to responding to MMS’s claims, the CIR invoked affirmative defenses, namely: the BIR records allegedly showed that prior to the WDL, a letter dated April 26, 2013 was posted and later received by a MMS representative (Enrico Vidal); MMS allegedly filed a false return; the assessment allegedly had become final and executory and therefore was supposedly not appealable before the CTA; and MMS allegedly carried the burden of showing the incorrectness of the assessments issued against it.

Trial Proceedings Before the CTA: Cancellation of the FAN and WDL

On November 6, 2018, the CTA rendered its Decision granting MMS’s petition and declaring the FAN and WDL cancelled for being null and void. The CTA’s approach, as later affirmed, focused on the validity of the assessment and the procedural prerequisites for issuing adverse administrative action, particularly the authority to conduct audit and the due process sufficiency of the CIR’s final administrative decision on a disputed assessment.

The CIR moved for reconsideration, but the CTA denied it in a Resolution dated January 30, 2019 for lack of merit. The CTA thus sustained the cancellation of the FAN and WDL.

CTA En Banc Proceedings and Mediation Referral

The CIR then elevated the case to the CTA En Banc. As part of the interim mediation mechanism, the CTA En Banc referred the case to the Philippine Mediation Center-Court of Tax Appeals (PMC-CTA) for initial appearance. On June 26, 2019, the PMC-CTA filed a “No Agreement to Mediate” report, indicating that the parties did not agree to mediation.

On September 1, 2020, the CTA En Banc denied the CIR’s Petition for Review and affirmed the CTA Decision and Resolution. The CIR’s motion for reconsideration was later denied by the CTA En Banc in a Resolution dated January 21, 2021.

Ruling of the CTA En Banc: Jurisdiction, Validity of the WDL Challenge, and Lack of Due Process

The CTA En Banc first addressed the CIR’s jurisdictional challenge. It held that the CTA had jurisdiction because appellate authority under Section 7(a)(1) of RA 1125, as amended by RA 9282, was not limited to decisions of the CIR in disputed assessments and refunds. It extended to “other matters arising under the NIRC or other laws administered by the BIR,” and this included the determination of the validity of the warrant of distraint and levy. Since the WDL was directly related to the assailed assessment and arose from the collection remedies sanctioned by Section 206 of the NIRC and related BIR rules, MMS’s petition was properly cognizable by the CTA.

Next, the CTA En Banc rejected the CIR’s theory that the adverse appealable act was the Final Decision on Disputed Assessment (FDDA) rather than the WDL. MMS categorically denied receipt of the FDDA allegedly dated July 9, 2013. The CTA and CTA En Banc treated the matter as requiring proof of receipt by the CIR. The CIR failed to establish by competent evidence that MMS received the FDDA, and the Court later declined to disturb these factual findings.

The CTA En Banc alternatively held that even assuming receipt, the FDDA would still be void for non-compliance with the requirements of Section 3.1.6 of RR No. 12-99. That rule requires the administrative decision on a disputed assessment to state the facts, the applicable law, the rules and regulations, or jurisprudence supporting the decision; otherwise the decision is void and cannot be treated as a decision on a disputed assessment. The CTA En Banc found no valid assessment against MMS due to lack of a valid Letter of Authority (LOA), since the BIR did not issue an LOA to Revenue Officer Ethel C. Evangelista authorizing the examination of MMS’s books of account and other accounting records for the taxable year of 2008.

The Parties’ Contentions in the Supreme Court

The CIR’s petition in the Supreme Court maintained that the FDDA, and not the WDL, should be the adverse decision appealable to the CTA. It also challenged the CTA En Banc’s rulings, including its treatment of jurisdiction and its evaluation of whether the CIR satisfied the procedural due process requirements for administrative decisions and assessment enforcement.

MMS, on the other hand, upheld the CTA and CTA En Banc determinations that the CIR did not prove receipt of the FDDA and that the assessment process suffered fatal procedural defects, including the lack of valid LOA authority and the due process invalidity of the final decision for failure to state the relevant bases.

Legal Basis and Reasoning: Limits of Rule 45 and the Deference to CTA Findings

The Supreme Court held that the petition lacked merit. It emphasized that under Rule 45, factual questions were proscribed. It reiterated the rule that only questions of law should be raised, because the Court was not a trier of facts and could not reweigh evidence already considered by the lower courts.

The Court defined a question of law as one where doubt exists regarding the applicable law given a certain factual setting, while a question of fact exists where doubt exists as to the truth or falsity of alleged facts. It then explained that factual findings of the CTA were accorded the highest respect and may be disturbed only if not supported by substantial evidence or upon a showing of gross error or abuse. It also invoked the presumption that absent clear and convincing contrary proof, the CTA rendered a decision valid in every respect.

Receipt or Non-receipt of the FDDA and the WDL as the Adverse Decision

On the issue of whether the FDDA or the WDL was the proper adverse act for CTA review, the Court held that the WDL was the adverse decision appealable to the CTA and not the FDDA. It reasoned that MMS denied receipt of the FDDA. Accordingly, it held it was incumbent upon the CIR to prove by competent evidence that MMS indeed received the FDDA. The Court found no reason to disturb the CTA and CTA En Banc factual findings that the CIR failed to prove receipt.

The Court also relied on Commissioner of Internal Revenue v. South Entertainment Gallery, Inc., where it held that receipt or non-receipt of final demand letters and assessment notices involved factual issues generally not proper for a Rule 45 petition. Thus, even on the assumption argued by the CIR, the FDDA’s substantive validity still failed due to due process defects under Section 3.1.6 of RR No. 12-99.

Due Process Requirements Under RR No. 12-99: Void FDDA for Failure to State Bases

The Court explained that adequate written notice under the assessment and decision process is essential. It emphasized that Section 228 of the NIRC declares an assessment void if the taxpayer is not notified in writing of the facts and law on which the assessment is made. It further noted that RR No. 12-99 requires the Final Letter of Demand (FLD) and the FAN to state the facts and the law or they become void. Most importantly, Section 3.1.6 of RR No. 12-99 requires that the CIR’s decision on a disputed assessment must state the facts, laws, rules, regulations, or jurisprudence on which it is based; otherwise, it is void and not considered a decision on a disputed assessment.

The Court treated the use of the word “shall” as making the written-notice requirement mandatory. It reasoned that written notice must cover both the FAN and the FDDA to allow the taxpayer to file an intelligent appeal with knowledge of how the CIR appreciated the taxpayer’s defenses. It also stressed that allowing otherwise would tolerate abuse and prejudice and would create a risk that the amounts reflected in the FDDA were arbitrarily made.

Applying these rules, the Court examined the contents of the alleged FDDA. It described that the FDDA merely informed MMS of supposed liabilities and referenced docket forwarding for collection remedies due to MMS’s supposed failure to act, but it did not present the factual and legal bases of the assessment. The Court therefore held that the FDDA was void for failing to state the factual basis and the law, rules, regulations, or jurisprudence on which it was based.

Authority to Conduct Audit: Lack of Valid LOA Rendered the Assessment Void

The Court then addressed the CIR’s assertion that the assessment was based on a valid LOA. It discussed that the CIR claimed reliance on LOA No. 2007-0034491 dated July 14, 2009, issued by Arnel SD. Guballa, which purportedly authorized specific revenue officers to examine MMS’s books for the taxable period covering 2008. However, the Court noted that it was RO Evangelista who conducted the investigation for MMS’s taxable year 2008.

The CIR argued that the LOA only authorized audit by the revenue officers listed, and that if the officers named were no longer able to perform, the authority should remain and the audit could be reassigned to another revenue officer as a logical consequence of the CIR’s powers under the NIRC. The Court rejected this position. It held that an LOA constitutes the authority given to the appropriate revenue officer assigned to perform assessment functions. Under Section 13 of the NIRC, a revenue officer must be validly authorized before conducting an

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